Shift Weather-Related Repair Costs to Owner

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January 19, 2018

Extreme weather is a scary and ongoing concern for both residential property owners and commercial real estate owners and their tenants. Especially if you live in an area where weather-related destruction is likely to happen, you should be thinking about how to prepare for a disaster. Adding safeguards to a solid damage and destruction clause in your lease is crucial to avoid the scenario that happened to you in your current space. A damage and destruction clause—if written effectively—can protect you if your space or the common areas of the building are damaged by a flood, fire, or some other casualty. And the clause isn’t just for requiring the owner to pay for your repairs. It can get much more in-depth than that, making the owner take other steps that are financially helpful. Here are three issues you should be aware of.

Financial issue #1: Rent abatement. After a casualty, a damage and destruction clause that’s not tenant-favorable might not give you the right to abate all of your rent, just your minimum rent. Also, it probably won’t give you the right to terminate the lease if the owner slowly repairs your damaged space or if the damage occurs near the end of your lease. And the damage and destruction clause in an owner’s lease form often says that the owner must make certain repairs and restore the space—unless the owner decides the repair costs will be too high—which gives it an inordinate amount of power over you. In that case, the owner may terminate the lease, which can be devastating for you and your business.

A well-drafted clause will set out your rent obligations while the owner makes the repairs. For instance, you’ll probably be allowed to abate your minimum rent in an amount proportionate to the amount of space you can’t use, but only if your space was actually damaged.

Financial issue #2: Damage repair responsibility. Don’t fall for a damage and destruction clause that gives the owner the option of repairing the damage or terminating the lease after a casualty, which is unfair to you. You’ve paid the cost of the owner’s casualty insurance (either through CAM costs/operating expenses or as a direct reimbursement), so you should get some benefit from it. To get that benefit, push for the clause to require the owner to repair and restore your space and the building or center after a casualty, unless the damage occurs in the last year of the lease.

Also, make the owner solely responsible for paying all repair costs. Otherwise, the damage and destruction clause will probably let the owner pay the cost of the repair work only to the extent of its insurance proceeds, leaving you with the difference. Any deficiency should be the owner’s problem, not yours. The owner is in control of the property and decides what value to insure it for.

You should take this one step further, though. To truly protect yourself in this manner, the lease discussion should be about who is insuring for this versus, say, your personal property. If the owner is insuring the “building” and/or “common areas,” state in the insurance clause that the owner must insure for 100 percent of the replacement. This will not only make this the owners’ responsibility, but it will require it to have adequate insurance if the time comes. Proper insurance can help tenants in a number of ways, so it’s generally a great idea to delve into insurance issues during negotiations.

Financial issue #3: Restore to same level of operation. Also, add a requirement that the space will be repaired/replaced to “substantially” the same level/quality it was before the casualty, including the parking area as well. It may be that your space isn’t damaged, but the center/building has lost its parking, which can leave you in a situation that’s detrimental to your business. And you shouldn’t have to foot the bill to get things up and running by chipping in to clean up access areas.

So really think about this situation in terms of access, not just damage; don’t get stuck in a situation where the casualty replacement actually blocks access to an undamaged area and you’re left with helping defray costs of ameliorating that. Also, you can manage some of the financial challenges here by dealing with dates—that is, how quickly the owner must do certain things and how much notice the owner will provide if it intends to terminate, or take other actions. To get this done, ask your attorney about trying to get the owner to draft this language in the lease:

Model Lease Language

If the [Building/Center] and/or the Premises, including parking areas, are partially or totally damaged or destroyed by a fire, flood, the elements, an accident, or other casualty (collectively, “Casualty”) prior to the last Lease Year, then Owner shall repair 100 percent of the damage and restore and rebuild the [Building/Center] and/or the Premises, except for Tenant’s Work and Tenant’s personal property, at Owner’s sole cost and expense as soon as possible with reasonable dispatch in accordance with good construction practice.